Is this a bear market bounce, or are we able to confidently say we are through the worst? Trading on Thursday and Friday on the major indices suggested the former and we could see equity markets start to hand back gains, albeit a full retest of the March trough would not be the base case until and unless we see a significant worsening of lockdown restrictions, perhaps as a result secondary and tertiary outbreaks; or there is persistent drag on the economy that is so far unacknowledged - listen in to this week's Investment Hour podcast for more on this. Upside risks are obvious – good news from drug makers on vaccines/treatments and economies swiftly reopening in the coming weeks.
Data from major world economies at the tail end of the week was dire and we expect more to come this week. Relatively subdued earnings from Apple and Amazon may be a factor due to their outsize weighting and importance on sentiment. In addition, the main message we are getting from corporate earnings releases is the lack of guidance as forecasting even the current quarter is impossible. And I think you start to worry that all the Fed actions and government support is already priced and is no longer capable of spurring fresh gains for equities. The positive news from Gilead’s treatment drug was tempered by growing acceptance that it’s not the same as a vaccine, which is probably not just around the corner.
The weekly charts show some pretty clear gravestone doji formations on the major indices that are typically bearish reversals in an uptrend. Some of these have very long wicks. A gravestone doji candle is formed when the open, close and low prices are close to each other and there is a long upper wick or shadow. The long wick indicates the bullish thrust was overcome by sellers and can mark the start of a new bearish trend. I’ll be looking for a MACD crossover for confirmation.
Looking at equity index futures we can see the outside day on Thursday that may at last signal the rollover for equity indices that I’d called last week. Although Europe was shut, the follow-through on Friday in London and New York is instructive and may point to a momentum shift that signals stocks are temporarily rolling over after ramping off the lows.
Looking at the cash market (pricing based off the futures out of hours), SPX turned off the March 6th cash market close of 2973 quite aggressively early on Thursday before the European session got underway with earnest and continued to be offered until support kicked in around 2840. However this failed and the S&P 500 closed near the lows at 2,830, down 24 points from the Monday cash open. The FTSE completed a round trip of 400 points, having opened the week at 5752 and closing at 5,763 for cash equities.
Elsewhere, EURUSD moved north of 1.10 to test the 100-day simple moving average after breaking the 50-day SMA, before pulling back slightly to 1.0980. The aggressive bullish crossover on the MACD proved a very good signal this time out. Got to be targeting the 200-day line now and then Mar swing high at 1.1150. If that goes it would open up move back to the YTD high above 1.14. The COT report shows speculators trimmed net long positions in the euro to 79.7k and overall in FX they were net buyers of USD again, the first time in nine weeks. GBPUSD handed back gains following the April end fix, turning out to be a pretty simple fade. Sterling retreated from the Apr 14th swing high and 200-day SMA around 1.2650. The pair may now struggle to regain 1.25
Gold keeps flirting with the 23.6 per cent retracement and is testing neckline support of a tentative double top formation, potentially calling for a retreat to $1640 on the 50-day SMA and 38.2% retracement. Speculative net long positions grew marginally to 262.7k.
Oil remains a worry as tank tops approach in the US, albeit the smaller-than-expected build in US inventories combined with hopes for a fast exit from lockdown spurred WTI to $20. Speculative long trades in WTI jumped 35 per cent - the worry is traders are trying to catch a falling knife and the physical market is still not able to cope. The move in specs and price action raises concerns about volatility in the front month contract heading into the rest of May.
What we learned last week:
The ECB is minding its off stump these days and offering a much straighter bat. Chief economist Philip Lane said on Friday it is the job to close spreads, after the Lagarde mis-speaking fiasco if you recall. “Such non-fundamental volatility in spreads impairs the smooth transmission of monetary policy across countries and it is a basic task for the central bank to counter such destabilising force,” Lane said in a post published on the ECB’s website.
Tesla and Elon Musk are still exceptionally good value; in the ‘at a party sense’ not in a forward P/E sense. Friday’s Twitter meltdown was an ‘epic fail’. Shares tumbled 10 per cent after Musk tweeted that he thought the stock was overvalued. Investors may accept this as ‘just Elon’ but regulators should be holding his feet to the fire. We should note however, that Musk has been here before, many times! In 2013 he spoke candidly about the stock valuation being too high and being based not on current financials but on a high degree of future execution. Within weeks the stock was 30 per cent lower.
Deflation is a risk. Consumer prices in Tokyo fell for the first time in three years in April. Whilst there are going to be notable exceptions in some areas of the economy where demand is unusually high right now, it goes to underline that point that the Covid-19 crisis is a profoundly deflationary shock to the global economy.
On Sunday, Warren Buffet said he has sold down all his airline stock – a wise move – no one ever made money running airlines.
What we are watching this week:
NFP – Friday’s nonfarm payrolls release is likely show the steepest decline in jobs ever. Last month’s -701k didn’t reflect many days of lockdown, so the coming month’s print will be seismic. However, this is backward looking data – we know that in the last initial jobless claims have totalled around 30m in six weeks – the NFP number could be as high as 22m according to forecasts. The unemployment rate will soar to 16-17 per cent. The main focus remains on exiting lockdown and finding a cure. Whilst it’s the VE Day holiday here this Friday I will be running a live webinar to cover the event.
BOE – The Bank of England may well choose this meeting to expand its QE programme by another £200bn, but equally it may choose to sit it out and simply say that it stands ready to do more etc. The Bank will update forecasts in the latest Monetary Policy Report, with the main focus likely to be on how bad they think Q2 will be. Estimates vary, but NIESR said Thursday the contraction will be 15-25 per cent. Again, what is the inflation outlook post-Covid?
RBA – The Australian dollar is our best risk proxy right now. The collapse in AUDJPY on Thursday back to 68.5 after it failed to break 70 was a proxy for equity market sentiment. We will wait to see whether the Reserve Bank of Australia meeting on Tuesday gives any fresh direction to AUD, however there is not going to be a change in policy this week.
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Neil Wilson is chief markets analyst at Markets.com